The welfare case for the European Monetary System

Abstract

This paper argues that the European Monetary System can be interpreted as a cooperative game yielding benefits to its members. A simple model is set up in which it is shown that the EMS solution is superior to Nash. If the menber countries differ, this superiority to Nash may require an occasional realignment. It will also then require that there be no sterilization of foreign exchange interventions, since otherwise the system would collpase. The EMS is interpreted in this paper as an arrangement manner, and not o Bretton-Woods type of arrangement when there is a leader-follower relationship inside.